Rents fall, profit rises for retailer

Date: January 26 2013

Colin Kruger

IF YOU want a clearer picture of the outlook for Australia's retailers, a good place to start is what their landlords are charging for rent, says Specialty Fashion Group chief executive, Gary Perlstein.

The group is getting discounts of 15 to 20 per cent on lease renewals, and new stores it is looking to open.

''You don't get these rental reductions if everything is going well in the marketplace,'' Mr Perlstein said.

It is why the womenswear retailer is not offering any earnings guidance for the financial year despite sending its shares soaring on Friday with the news it expects its first-half profit to nearly triple despite flat sales.

Lower rent costs, along with supply chain efficiencies and higher selling prices of its clothing, were some of the factors that helped the group defy moribund conditions that are not expected to improve in the near future, according to Mr Perlstein.

Sales revenue in the group's 892 stores was up 2 per cent to $119.7 million, although the increase reflected an extra week's trading for the December half compared with the previous period.

''The economic uncertainties and structural changes affecting retail have not gone away, but we have pulled all the levers within our control to achieve sustainable improvements and our results reflect this,'' Mr Perlstein said.

The owner of Katies and Millers fashion stores expects its net profit for the six months to December 31 to be in the range of $17 million to $18 million compared with $6.2 million for the first half.

SFG said its gross profit margin improved by 477 basis points to 62.4 per cent. A further 150-basis-point improvement was expected for the current half year.

SFG shares have now doubled since October last year after jumping as much as 47 per cent during trading on Friday to a high of $1.03 before closing at 97¢.

Deutsche Bank raised its price target on the stock to 95¢ on Friday, saying the result ''reflects company-specific factors including supply chain initiatives, as well as a generally reasonable Christmas trading period for specialty apparel.''

Another women's fashion group, Noni B, engineered a surprise profit upgrade last January that led to the stock doubling over the past year, but the stock took a battering on Thursday after it disappointed the market with an earnings forecast 30 per cent below the first half.

JPMorgan says cyclical and structural issues will continue to affect the retail sector this year.

While consumers are ''well positioned'' compared with those in other countries, the broader picture is mixed, with rising unemployment and cost-of-living pressures to remain challenging, despite falling interest rates, JPMorgan said.

There are also structural issues such as the breakdown in the relationship between net disposable income, consumption and retail spending - income growth is leaking into debt repayment, online shopping and international travel.

But Macquarie Group said this week that conditions were improving for our retailers.

The ''collapse'' in volume growth for clothing, footwear, accessories and department stores in 2010 had finally eased, it said.

''Volume growth returned to the categories in March 2012 and we expect current growth rates will be maintained across 2013,'' a Macquarie Group statement said.